Wednesday, February 22, 2017

"be in the right place at the right time" is not a strategy for buying a house

How can you afford to buy a house in sought-after parts of DC or other close-in areas? By moving there twenty years ago. But that's no help to people navigating the housing market today.

Photo by the author.

One out of every ten houses currently for sale in DC is listed for over a million dollars. Curious to find out who's living in them, former GGWash contributor Rob Pitingolo at the Urban Institute found that million-dollar home owners in DC are generally not wealthy, nor do they work in high-paying fields. Many of them have just lived here for a while and bought their houses before 2000, when house prices were much lower. WAMU talked to Cleveland Park resident Robert Edmonds, who said he was simply in the right place at the right time:

“I think it would have been a lot more challenging to try to buy now,” Edmonds said. “We purchased about 15 to 18 years ago, when the market was just starting to really skyrocket. … I wanted to start a family, and we wanted to buy, get some equity, and I think we just happened to do it at the right time. If we did it 8 or 10 years later, I think we really might have regretted it for a while, at least.”

Growing up here 20 years ago, I would've found it hard to believe that neighborhoods like Petworth (where, in 1977 my grandparents bought an apartment building for $30,000!) would ever become a "hot" area. But due to a combination of low interest rates, demographic shifts, and a resurgent interest in city living, house prices skyrocketed. Between 2000 and 2005, the median house price in DC rose from $150,000 to $420,000, and today it's $575,000.

And folks who bought homes in neighborhoods that were, at the time, not that desirable, discovered later they had won the lottery. So what are homebuyers starting out supposed to do now? One real estate agent told WAMU that they should be patient, save up, and eventually they can buy a million-dollar home too:

“A lot of people who live in those $2 million houses now started out buying maybe a $150,000 place first, then eventually sold it, bought a $500,000 or $600,000 house, put some time, put some work into it, paid down the mortgage so that they are building equity. That equity then can be transferred to a new house. And once you do that three or four times, you find that you are actually in a position to maybe spend $1.5 or $2 million, if that’s your goal.”

That generally makes sense. Even people who bought houses in a much-cheaper DC 20 years ago started out small and worked their way up. But the entire structure of the local and national economy has changed since then. Twenty- or 30-somethings today earn less than their counterparts did in 2004, have less stable incomes, and of course have staggering student debt. As a result, for many Millennials that cheap starter house is out of reach, let alone the more expensive move-up house.

And besides, that starter house may not be that cheap. WAMU shows a photo of a modest 1920s colonial in Cleveland Park that sold for a million dollars, but when it was built, it was probably a house for a young family starting out. Due to the shortage of homes in this region, in many areas that "first house," whether it's a small single-family house, a rowhouse, or a one-bedroom condo, is now priced like a luxury house. As a result, first-time homebuyers can't afford homes that were essentially built for them.

The article notes a variety of programs that DC (and other jurisdictions) are doing to help make first-time home buying more affordable, like offering grants to help cover closing costs or a down payment. But the real solution is to build more homes. Montgomery County recently did a rental study that found that the greatest demand are for low-cost units and really high-cost units. Translated to for-sale housing, this means starter homes (for people starting out) and luxury homes (for people who can afford them), and thus relieves the pressure to turn starter homes into luxury homes.

Twenty years ago, DC was affordable because the number of people who wanted houses, and the number of available houses, were a lot closer together. Now, there are more people than houses, and prices have risen in response. Being in the "right place and the right time" may not work anymore. If we want the next generation of homebuyers to be able to live here, we need to more homes for them to buy.